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Stress Testing in a Structural Model of Bank Behavior

Thomas Siemsen, Sigurd Galaasen, Pablo D'Erasmo (), Alfonso Irarrazabal and P. Dean Corbae ()
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Alfonso Irarrazabal: BI Norwegian Business School

No 1315, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a structural banking model for microprudential stress testing. We model a single bank that optimally chooses portfolio allocation, dividend policy and exit, facing regulatory and technological constraints. In our calibrated model, the bank has an incentive to hold a buffer stock of capital even in excess of regulatory requirements to protect its charter value. We explore optimal behavior during severe macroeconomic stress. We employ bank’s endogenous exit choice as a novel metric for counterfactual stress outcomes. Finally, we discuss implications for current stress testing framework.

Date: 2016
New Economics Papers: this item is included in nep-ban and nep-dge
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